The economic value of ESG practices: New evidence from the overcapacity reduction effect of ESG performance

Overcapacity is a key bottleneck restricting high-quality economic development, and the resulting resource misallocation and efficiency losses need to be addressed urgently. Although existing studies have examined the inhibitory effects of environmental regulation and corporate social responsibility on overcapacity, whether environmental, social, and governance (ESG) activities exert an overcapacity governance effect remains unexplored. Based on symbiosis theory, organizational learning theory, and dynamic capability theory, this study systematically investigates the governance effect of ESG performance on overcapacity and its underlying mechanisms using micro-data from Chinese listed companies. The results show that there is a significant negative correlation between ESG performance and overcapacity, indicating that good performance on ESG practices has a substantial inhibitory effect on overcapacity. Mechanism analysis demonstrates that ESG performance operates through dual paths: the “investment constraint effect” (restraining overinvestment) and the “innovation-driven effect” (promoting product and technological upgrades). Heterogeneity analysis reveals that the overcapacity reduction effect of ESG performance is more significant in high-polluting industries, large firms, and firms with lower financing constraints. These findings confirm the economic value of ESG activities in optimizing resource allocation, address the doubts of the shareholder supremacy doctrine, and provide new micro-evidence for Porter’s hypothesis. Furthermore, they have important policy implications for encouraging corporate ESG practices and promoting energy conservation and sustainable development.